About half of Americans own stocks, and they’ve already cashed in on Donald Trump’s surprise election in the 2016 presidential race. The Dow Jones Industrial Average has hit a new record high, with broader markets up a nifty 1.5% or so since Election Day. That translates into about $350 billion in new stock-market wealth.
A few sectors are doing much better. Bank stocks are up about 8% since Election Day, in the hope that Trump will follow through on his promise to loosen regulations on Wall Street firms like J.P. Morgan Chase (JPM), Citibank (C) and Bank of America (BAC). Until Nov. 9, investors expected the opposite, since Hillary Clinton, the now defeated favorite, had promised to tighten bank regulations, not loosen them. So banks are benefiting from an abrupt improvement in their earning prospects.
Other stock-market winners, so far: Pharmaceutical firms like Pfizer (PFE) and Merck (MRK), which may have a freer hand to hike drug prices under a Trump administration. Oil stocks such as Exxon Mobil (XOM) are up, since Trump has said he’ll kill many regulations that prevent drilling. And Caterpillar (CAT) shares have soared on the outlook for a big boost in spending on road and bridge projects.
Trump didn’t get elected to help the shareholder class, of course. But the nation’s haves are nonetheless first in line to benefit from many Trump policies intended to aid working- and middle-class families. Trump’s desire to help the nation’s “forgotten men and women,” as he calls them, may be genuine, but he will face the same problem as many before him: It’s devilishly hard to help those falling behind without first lining the pockets of the economy’s usual gatekeepers.
Boosting the fortunes of the shareholder class
Trump favors supply-side economic policies similar to those pursued by Ronald Reagan in the 1980s and George W. Bush in the early 2000s. In some ways he’d go even further, with substantial tax cuts for businesses and wealthy families. Small businesses and ordinary families would get tax cuts too, but lower taxes for those at the top will add substantially to the national debt and raise the government’s borrowing costs. That will become a drag on growth at some point.
Those tax cuts are supposed to free up more money for spending, and they will very likely boost growth for a while. But it’s a leap of faith to assume more spending will create a substantial number of new, good-paying jobs, especially with automation and software handling more and more work once done by humans. George W. Bush cut taxes in 2001 and 2003, but real GDP growth exceeded 4% only one year during Bush’s 8 years in office. Incomes stagnated under Bush, manufacturing employment declined every year and the 43rd president left office amid a daunting recession.
If tax cuts don’t produce the desired results, Trump will be in a pickle: The wealthy will have pocketed their share of the bounty, while higher debt levels will leave Washington less maneuvering room than ever to help those who are struggling. If there’s a recession, it may be harder than before to extend unemployment insurance and offer other subsidies meant to help those laid off.
There are other elements to Trump’s stimulus plan, but they, too, flow through the holders of capital before they get to the workers who really need the lift. He’d offer a low, one-time tax rate on more than $1 trillion of profits US firms hold overseas, giving them an incentive to bring the money home. The hope is they’d invest more in hiring, building factories and types of spending in the United States. But when Bush 43 enacted a similar one-time tax holiday on overseas profits, most of the money went toward dividend increases and stock buybacks that benefited shareholders first and foremost. Trump could set some rules on how repatriated profits could be spent, but even then it would be very hard to direct companies to spend money on workers or facilities if they don’t think it’s good for business.
Trump wants to slash regulations, to make it easier to do business and speed up growth. That could produce more hiring, but not until it improves profitability and pushes stock values upward. That’s one reason Exxon’s stock has risen since the election—Trump has promised to make drilling easier. Again, workers wait for their portion while shareholders enjoy a quick gain.
Trump’s plan to spend up to $1 trillion on new road and bridge projects would be one way of creating jobs directly where those projects take place. But those would be temporary jobs that end when the project is over. And infrastructure spending has to be paid for. Trump wants to use private funding for many such projects, but that would require tolls and user fees to produce cash flow for investors, a necessary incentive. Funding projects this way sometimes creates the impression that ordinary people paying tolls to get to work every day are funding profits for wealthy investors somewhere far away.
These aren’t necessarily problems inherent to Trump’s specific plan. Capitalism itself conveys many advantages to shareholders and those who own assets, often at the expense of workers. Strong growth during most years from 1950 to 2000 gave workers more leverage to demand higher pay and better working conditions. But we’ve been in a lower-growth world in the 21st century, and supply-side contrivances like tax cuts might move money around without doing much to boost demand, output or jobs. If Trump’s plan flops, the wealthy will end up fine. The rest could find themselves with fewer resources than ever.
